Our current investment in Taylor Wimpey (LSE:TW
), the U.K. homebuilder, illustrates several additional ways that accounting figures can be misleading. We first bought shares of Taylor Wimpey in April 2011, in the midst of a severe U.K. housing depression. The company had been producing enormous accounting losses, as its land holdings were being written down to values reflective of the economic depression in which the auditors were assessing the values. Meanwhile, the company also found itself selling houses at depressed prices built on land that had been purchased in years prior at much higher costs. On the face of it, the accounting statements were ugly. While Taylor Wimpey was forced to make downward accounting adjustments to its asset base, it owned the same amount of property within its land bank both before and after the write downs.The accounting losses at that time did not, in our minds, reflect the long-term economic reality of the business. As we look at Taylor Wimpey's financial statements today, the stock having nearly tripled from our cost, the company is producing record profit margins.The large profit margins are, in part,enabled by current high house prices in the U.K., but additionally by the fact the Taylor Wimpey's costs are artificially reduced by virtue of its land having been written down during the real estate depression. In our minds, neither during the industry depression nor in recent record-breaking quarters have the company's financial statements been an accurate representation of reality. In both cases, material analytical adjustments are required to reconcile the financial statements to the real world and the truth is probably somewhere between the two extremes.
From Third Avenue Management
’s third quarter 2013 letter to shareholders